Does Momentum Favor the Bulls or Bears?

Momentum can be an excellent tool for understanding the movements in the market and the ‘health’ of a trend. I like to see momentum for a market reflect the price action – hitting new highs and staying in its own version of an up trend. I often look for divergences in momentum, signs where price is heading one direction but momentum is going the opposite direction as warning signs of a potential change in trend for price.

Each Weekly Technical Market Outlook post I write shows the daily chart of the S&P 500 ($SPX) and three momentum indicators, the Relative Strength Index (RSI), MACD, and the Money Flow Index. However understanding what’s happening on higher time frames can be just as important, if not more so, when analyzing the market. With that, lets check in on the weekly and monthly charts.

First up is the weekly chart of the S&P, along with the RSI and MACD indicators. Since the 2011 near-bear market the Relative Strength Index (RSI) has been in a bullish range. We’ve seen this measure of momentum continuously hit ‘overbought’ levels while holding above 40 on downturns. This tells us that momentum is strong and the trend in price should remain intact.

Recently the RSI and began making a series of lower highs as price as continued to advance. The first lower high was followed by a near 10% drop in the S&P back in October. Since then, the market has rallied and hit new highs and the divergence has steepened. While this bearish divergence is considering, the indicator remains in a bullish range as holds above its prior lows.

When looking at the MACD indicator, which is another well-known measure of momentum, it also has been experiencing a bearish divergence. The difference between the RSI and MACD divergences is the MACD downturn has been with us for all of 2014. So far the S&P has seen 3 distinct lower highs in the MACD, which is more than we saw going into the 2007 peak.

SPX weekly

The monthly chart of momentum for the S&P 500 can cause confusion for some traders. Many will look and see that we’ve been ‘overbought (over 70 on the RSI) for almost the entire year and point to that as a reason to be bearish. But we know better! being ‘overbought’ just means that momentum is strong, it doesn’t require the price to go down substantially. Going into the 2007 peak, the monthly RSI began making a lower high. We aren’t seeing that type of bearish action in the latest set of data. While the peaks in the momentum indicator are not all exactly to the same level, in my opinion they are still showing strong signs of positive momentum. I’m currently watching to see if a break under 70 falls under the prior August 2013 low and if it’s then followed by a clear lower high on any rebound we see soon follow.

The MACD indicator has done a nice job highlighting the slow grind higher in momentum. With the recent weakness in December the fast line (black line) is close to crossing below the slow line (red line) which many traders view as a bearish signal. While I’m not overly concerned with the absolute level of the MACD, it’s interesting to note that we are currently seeing stronger momentum based on the currently monthly reading than at the 2000 and 2007 highs.

SPX MonthlySo what is momentum telling us? In my opinion, the weekly and month charts have continued to confirm the bull market and the up trend in U.S. stocks. While the divergences that are taking place in the RSI and MACD on the weekly chart are concerning and could lead to a protracted downturn, the fact that the Relative Strength Index remains in a bullish range is a positive sign in my eyes. We’ve yet to see a breakdown on the monthly chart, which would likely occur, but of course is not a requirement, ahead of a major market high.

Understanding what’s taking place on the higher time frames can give us clarity and a break away from the noise that takes place on the intraday and even the daily charts.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Dr. Copper Has Been Replaced

There used to be a belief on Wall Street that copper had a Ph.D. in economics since it was often used as a barometer for the economy and often the market. Traders would look for divergences between the copper and the equity markets for signs of potential danger. If Dr. Copper began to weaken it was believed that the stock market would soon follow. While this may have been the case at one point I would argue it no longer is today or has been for a few years now.

Dr. Copper in my opinion has been replaced by technology, specifically semiconductors. The market seems to be much more focused on the happenings of Silicon Valley rather than Milwaukee or Detroit. While the industrial sector still remains a large piece of our economy it no longer is the driver of growth. At least that’s what price action has been telling us.

The chart below shows the performance of the S&P 500 (black line), the Semiconductor Index (red line), and the spot price of Copper (green line). You can clearly see that copper has not been enjoying the bull market party while semi’s have been moving right along with the market. It’s a little hard to see, but in 2011 we saw semiconductors break away from the S&P 500 as the industry made a lower low, a divergence that the equity market eventually fixed by falling in price by nearly 20%. Ever since then we’ve gotten confirmation by the semi’s of the new highs in the S&P.

It seems Copper has been expelled while the semiconductors step to the front of the class.

semi vs copper

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Is It Time To Catch the Falling Knife in the Energy Sector?

The Energy Sector ($XLE) has been an awful performer over the last several months. While consumers cheer at the decline of prices at the pump and economists get anxious about the impact of falling oil prices will have on GDP. Luckily as technicians we aren’t as concerned about why a market acts the way it does.

Back in July I wrote about the bearish chart setup for the energy sector and why I thought it was due to pullback. On Monday, I showed the chart of the relationship between XLE and SPY, with it being the first time monthly momentum having entered ‘oversold’ territory. Being the worst performing sector year-to-date, is it time to start looking to catch the falling knife? The latest price action and historic lows in sentiment may help provide some key insights.

Click Here to see the charts and keep reading at See It Market

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.